Need Help With Income Statement / EBITDA etc.
Ok guys, so I'm having a little trouble with this... In terms of succession, I had thought that a typical income statement looked like this:
Net Sales
(COGS)
--------------
Gross Income
(SG&A Expense)
(Possibly R&D)
------------------------
EBITDA
(Depreciation and Amort)
(Possibly "other" operating expenses)
------------------------------------------------------
EBIT
(Interest Expense)
Unusual Items
(Income Tax Expense)
---------------------------------------------
Net Income
Is this totally wrong? I figured out of pure logic these EBIT, and EBITDA placements make sense because they are BEFORE their corresonding expenses. Now that I've been reading up on EBITDA and EBIT it says that EBITDA is: Net income +Interest +Depreciation and Amortization? This makes absolute no sense to me seeing as this title states it is before Interest and D&A? I'm pretty confused. I also thought that Cash Flow from operations was the same as EBITDA. Apparently I'm all over the map here and need some help. Does anybody have a successive example of a proper income statement, and a way to show where EBIT, EBITDA, Operating cash flow, and FCF come into play? Sorry in advance about the length of the post.
Here is Wal-Mart's latest 10-Q (filed each quarter with the SEC): http://sec.gov/Archives/edgar/data/104169/000010416912000014/wmt7312012…
Scroll down to the income statement on page 2.
Revenues are at the top. Then you have all of your operating expenses; on WMT's income statement, the operating expense line items are 'cost of sales' and SG&A. D&A is buried within those numbers and can be found by going to the statement of cash flows. Subtract cost of sales and SG&A from revenues to get operating income. As you can see, interest and taxes are the only expenses that remain after operating income, so operating income is the same as EBIT.
EBITDA is Earnings Before Interest Taxes Depreciation and Amortization, so EBITDA = EBIT + D&A. EBITDA is a non-GAAP measure so companies are not allowed to include it in their income statement.
Since net income has already subtracted out interest, taxes, depreciation, and amortization, you have to add back all of those items to get EBITDA.
EBITDA is sometimes used as a proxy for cash from operations, but it'll never be exactly the same. One way to estimate free cash flow is by subtracting capital expenditures from EBITDA. Another is to subtract capital expenditures from cash from operations.
As you analyze more and more companies, you'll find that there's no "formula" for evaluating a company. You need to get comfortable with the business and just kind of figure out what makes sense in terms of calculating FCF/owner earnings.
Thanks so much for the clarification.
So is it generally assumed that EBIT and operating income are the same thing? I'm just a little confused because,this "other income" that comes after operating income is presumably interest income or something similar correct? In Wal Marts 10Q it seems they just lump both interest income and expense into the same sub category therefore forcing this operating income to be the same as EBIT? So what im trying to get at is: are these terms the same thing? - Are interest income/expeneses usually grouped in one interest heading like this with most companies? For example, if interest income was included before interest expense, would this have created an EBIT for Wal Mart separate from operating income?
dude its pretty simple, one way you are working top down, subtracting expenses from revenue to get to the income metric. The other, you are working from the bottom up (profit), which already as the expenses subtracted out, and you are adding expenses back to get to an income metric with fewer expenses subtracted out.
Gotcha. It's just the BEFORE that throws me off, considering the values are included.
'Before' means 'before x is subtracted from revenues.' So EBIT is net income before interest and taxes are subtracted; the easiest way to arrive at EBIT, then, is just to add back interest and taxes so that they are no longer included in the calculation.
The accounting standards require companies to calculate operating income before all interest and taxes. Since you are trying to gauge the profitability of operations, not the company's ability to earn interest on cash, you should always exclude interest income from EBIT in addition to interest expense. But again, the interest income line will always be below the operating income calculation, so you do not have to add it back.
Investopedia is a good resource for getting the hang of accounting terms. Here's the entry for operating income: http://www.investopedia.com/terms/o/operatingincome.asp#axzz2Da8zkRe1
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